Bonds In Conversation : High And Dry Markets and The Blaming Game

Total global bond issuance has fallen 61.3% in the past 2 weeks and the backlog is growing which means that borrowing costs will have to rise to whet investor appetite. http://www.bloomberg.com/news/articles/2015-09-01/bond-sales-drought-in-august-swells-pipeline-with-m-a-debt-deals

It is a slow grind because of market paralysis stemming from illiquidity that keeps prices in check but the outflows continue.

“Net outflows are reported for All Taxable Bond funds of -$0.040 billion, bringing the rate of outflows of the $2.246 trillion sector to -$1.021 billion/week…International & Global Debt funds posted net outflows of -$0.181 billion…Net outflows of -$2.273 billion were reported for Corp-Investment Grade funds while High Yield funds reported net outflows of -$0.227 billion…Money Market funds reported net outflows of -$10.350 billion…ExETFs – Municipal Bond funds report net outflows of -$0.545 billion.” Source : Lipper

“Flows into investment-grade bond funds were negative for the week ended August 26, making it the fifth successive week of outflows. Investment-grade bond funds saw net outflows of $1.99 billion in the week, the largest outflow of 2015 so far. This compares to outflows of $1.09 billion in the week ended August 19.” https://marketrealist.com/2015/09/investment-grade-bond-funds-witness-largest-outflow-2015/

Till this month, issuance of investment grade papers have broken all records at US$1.21 trillion for the year. Isn’t Apple lucky to be the second largest issuer this year before all this at US$ 21.45 bio ? AT&T wins at US$ 22.95 bio.

The only healthy market that is ploughing away is the domestic CNY debt market, making up for loss time as Chinese issuers go home to save themselves. It is pity the rest of the world cannot follow suit and the CNH market has dried up with the yuan devaluation.

It is all about the Blame Game for stock markets now and some analysts are happily gloating that they spotted it first by noting the credit “canary in the coalmine” a few days before the Black Monday and the Black-er Monday after.

“According to the BofA corporate bond index, the gap between yields on investment-grade corporate bonds and US government bonds has moved to 164 basis points. This takes the difference between credit spreads per point of equity volatility to 10.26bp, BofA calculates, its highest level in more than seven years.

“It’s a signal, but not necessarily a timing tool,” said Jack Ablin, chief investment officer at BMO Private Bank.

He agreed that equity investors should be concerned by pessimism in the bond markets.”http://www.ft.com/intl/cms/s/0/f325ad3c-44b3-11e5-b3b2-1672f710807b.html#axzz3kjF2Y8Ym

That is blame no.1.

Blame no. 2 – China, which cannot be blamed enough and I have been wondering how people’s brains worked just 6 months ago and if the air we breathe is now different ? Because China is now blamed for Europe, EM, commodities and everything we need to blame. And of course, we have the Republican presidential candidates to lead the charge so the blame will continue.

The IMF and their Chinese GDP forecast makes me wonder why bother ? Their forecast was wrong and misleading in the first place, causing unnecessary exuberance ?

Blame 3 – Commodities, which brings us back to China.

Blame, blame, blame.

Blame ETFs, leverage and forced selling which is now forcing regulators to relook at things, Dodd Frank and Basel 3 for limiting banks from taking positions and fueling illiquidity, I am just slightly perturbed no one is blaming the Fed yet or perhaps it is a little too soon and journalists need to save some fodder for next week as the 16-17 Sept FOMC nears.

Bonds investors beware and those who heaved sighs of relief when equities melted just because they are holding on to a bond portfolio that they cannot sell ?

Equities, at least, are liquid and some of the analysts who had pointed out the discrepancy between credit spreads and the equity markets back in Aug, are now saying that the equity sell-off is overdone.

 

For me, I am not sure if the illiquid bond markets will take the cue from equities from here as equities took the cue from bonds, as it is claimed and we have less than 2 weeks to the FOMC.

All eyes on the make-or-break-the-markets Non Farm Payrolls tonight and more volatility to come as China returns to work on Monday. Every investor is left high and dry, happy to know that few have been spared, including hedge funds.

Singapore markets are paralysed to say the least. Government bonds and interest rates shooting through the roof as the currency continues to weaken. Even trading in investment grade names have become a pain as the new LTA 7Y and 12Y inflict heavy losses on investors, losing 2-3% in price terms since their recent issuance.

And I think any bank bold enough to consider bringing out another PB bond issue (bond issues targeted at PB clients) will risk the wrath of their clients (and asked for bids for their previous bond issues). Thus, expect a lull period.

There are obvious discrepancies in bond prices too but we are told to ignore them because not many people, including traders, are sure about the prices as well. For instance, we have Koh Brothers 2018 at 100 and 4.8% when contemporary Tiong Seng 2018 is at 93 or so, and over 8%.

Real money investors, discouraged by the price action and lack of credit correction, are now focused on cherry picking cheaper G3 currency papers to swap into SGD to take advantage of the higher SGD rates and the first time SGD out-yields the AUD.

I bid everyone a nice weekend and leave with the indicative prices.

Asian Credits

SGD 2015 Bonds

SGD 2014 Bonds